Lars Stole (University of Chicago, GSB) Jeffrey Zwiebel (Stanford University, GSB)
Abstract
We present a new methodology for studying the problem of labor contracting within a firm's boundaries where contracts provide only a minimal commitment to wages and employment. Given the peculiar contractual incompleteness of labor contracts, the resulting wages and profits under an interesting class of complete information bargaining games distort the technological and organizational decisions facing the owner of the firm's capital. We show that in such settings where labor contracts are nonbinding, these decisions are distorted in an economically distinct way compared to the standard neoclassical firm. Among other things, we demonstrate that a firm with a nonbinding contractual basis will, relative to a neoclassical firm, (i) overemploy labor, (ii) underemploy capital, (iii) choose inefficient ``frontloaded'' technologies, (iv) de-emphasize scale and scope economies, and (v) inefficiently allocate labor across productive assets. We apply our analysis to product market competition, unionization, hierarchical management, and horizontal mergers.
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Length: 34 pages Date of creation: 12 Oct 1993 Date of revision:
13 Oct 1993 Handle: RePEc:wpa:wuwpga:9310001
Note: 34 pages, uuencoded postscript file Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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